##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2006.
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION
PERIOD FROM  TO
 Commission file number: 0-22187
 RENAISSANCE LEARNING, INC.
  Wisconsin
    
    39-1559474(State or other
    
    (I.R.S. Employerjurisdiction of incorporation)
    
    Identification No.)
 2911 Peach Street
P.O. Box 8036
Wisconsin Rapids, Wisconsin
 54495-8036
 (715) 424-3636
 þ o
  o þ o
 o þ
  Outstanding atClass
    
    October 31, 2006Common Stock, $0.01 par value
    
    29,152,888




---



##### 



RENAISSANCE LEARNING, INC.
 INDEX TO FORM 10-Q
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at September 30, 2006 and
December 31, 2005
    
    
    1Condensed Consolidated Statements of Income for the Three Months and Nine Months
Ended September 30, 2006 and 2005
    
    
    2Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2006 and 2005
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    7Item 3. Quantitative and Qualitative Disclosures About
Market Risk
    
    
    11Item 4. Controls and Procedures
    
    
    12PART II  OTHER INFORMATIONItem 1A. Risk Factors
    
    
    12Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    12Item 5. Other Information
    
    
    13Item 6. Exhibits
    
    
    13Restricted Unit AgreementAmendment to Credit AgreementCertificationCertificationCertificationCertification




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
 September 30,
    
    
    December 31,2006
    
    
    2005(In Thousands, Except Share and PerShare Amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,112
    
    
    $
    7,083Investment securities
    
    
    7,219
    
    
    
    23,363Accounts receivable, less allowances of $1,183 and $1,340, respectively
    
    
    13,711
    
    
    
    11,393Inventories
    
    
    3,550
    
    
    
    4,138Prepaid expenses
    
    
    1,856
    
    
    
    1,722Income taxes receivable
    
    
    1,510
    
    
    
    Deferred tax asset
    
    
    4,576
    
    
    
    3,693Other current assets
    
    
    208
    
    
    
    390Total current assets
    
    
    45,742
    
    
    
    51,782Investment securities
    
    
    2,444
    
    
    
    4,132Property, plant and equipment, net
    
    
    11,740
    
    
    
    11,475Deferred tax asset
    
    
    
    
    
    
    738Goodwill
    
    
    46,872
    
    
    
    45,906Other intangibles, net
    
    
    6,274
    
    
    
    6,787Capitalized software, net
    
    
    850
    
    
    
    420Other receivables
    
    
    5,768
    
    
    
    5,909Other non-current assets
    
    
    468
    
    
    
    1,233Total assets
    
    $
    120,158
    
    
    $
    128,382LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,730
    
    
    $
    3,280Deferred revenue
    
    
    22,818
    
    
    
    18,255Payroll and employee benefits
    
    
    3,898
    
    
    
    4,156Income taxes payable
    
    
    
    
    
    
    313Other current liabilities
    
    
    3,892
    
    
    
    4,239Total current liabilities
    
    
    34,338
    
    
    
    30,243Deferred revenue
    
    
    670
    
    
    
    670Deferred compensation and other employee benefits
    
    
    1,631
    
    
    
    1,603Deferred tax liability
    
    
    998
    
    
    
    Total liabilities
    
    
    37,637
    
    
    
    32,516Shareholders equity:Common stock, $.01 par; shares authorized: 150,000,000; issued:34,736,647 shares at September 30, 2006 and December 31, 2005
    
    
    347
    
    
    
    347Additional paid-in capital
    
    
    55,551
    
    
    
    56,522Retained earnings
    
    
    123,988
    
    
    
    118,233Treasury stock, at cost: 5,534,354 shares at September 30, 2006
4,387,594 shares at December 31, 2005
    
    
    (95,958
    )
    
    
    (78,845
    )Unearned restricted stock compensation
    
    
    (1,457
    )
    
    
    (438
    )Accumulated other comprehensive income
    
    
    50
    
    
    
    47Total shareholders equity
    
    
    82,521
    
    
    
    95,866Total liabilities and shareholders equity
    
    $
    120,158
    
    
    $
    128,382
  - 1 -




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
(unaudited)
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands, Except Per Share Amounts)Net sales:Products
    
    $
    19,533
    
    
    $
    25,615
    
    
    $
    69,783
    
    
    $
    70,375Services
    
    
    5,634
    
    
    
    5,774
    
    
    
    15,822
    
    
    
    16,918Total net sales
    
    
    25,167
    
    
    
    31,389
    
    
    
    85,605
    
    
    
    87,293Cost of sales:Products
    
    
    3,708
    
    
    
    5,297
    
    
    
    13,019
    
    
    
    8,812Services
    
    
    2,691
    
    
    
    2,100
    
    
    
    7,372
    
    
    
    6,672Total cost of sales
    
    
    6,399
    
    
    
    7,397
    
    
    
    20,391
    
    
    
    15,484Gross profit
    
    
    18,768
    
    
    
    23,992
    
    
    
    65,214
    
    
    
    71,809Operating expenses:Product development
    
    
    3,990
    
    
    
    4,927
    
    
    
    12,477
    
    
    
    12,583Selling and marketing
    
    
    8,036
    
    
    
    8,325
    
    
    
    24,781
    
    
    
    22,432General and administrative
    
    
    3,755
    
    
    
    3,341
    
    
    
    12,653
    
    
    
    9,370Total operating expenses
    
    
    15,781
    
    
    
    16,593
    
    
    
    49,911
    
    
    
    44,385Operating income
    
    
    2,987
    
    
    
    7,399
    
    
    
    15,303
    
    
    
    27,424Other income, net
    
    
    316
    
    
    
    404
    
    
    
    942
    
    
    
    1,363Income  continuing operations before income taxes
    
    
    3,303
    
    
    
    7,803
    
    
    
    16,245
    
    
    
    28,787Income taxes  continuing operations
    
    
    1,222
    
    
    
    2,887
    
    
    
    6,011
    
    
    
    10,651Income  continuing operations
    
    
    2,081
    
    
    
    4,916
    
    
    
    10,234
    
    
    
    18,136Income from discontinued operations, net of tax benefit
of $1,417 for the nine months ended September 30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    584Net income
    
    $
    2,081
    
    
    $
    4,916
    
    
    $
    10,234
    
    
    $
    18,720Earnings per share:Basic:Continuing operations
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.34
    
    
    $
    0.58Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.02Net income
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.34
    
    
    $
    0.60Diluted:Continuing operations
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.34
    
    
    $
    0.58Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.02Net income
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.34
    
    
    $
    0.60Cash dividends declared per share
    
    $
    0.05
    
    
    $
    0.05
    
    
    $
    0.15
    
    
    $
    0.15
  - 2 -




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 For the Nine Months EndedSeptember 30,2006
    
    
    2005(In Thousands)Reconciliation of net income to net cash provided by operating activities:Net income
    
    $
    10,234
    
    
    $
    18,720Income from discontinued operations
    
    
    
    
    
    
    (584
    )Income from continuing operations
    
    
    10,234
    
    
    
    18,136Adjustments to arrive at cash provided by operating activitiesDepreciation and amortization
    
    
    2,585
    
    
    
    2,460Amortization of investment discounts/premiums
    
    
    153
    
    
    
    332Restricted stock compensation expense
    
    
    490
    
    
    
    Deferred income taxes
    
    
    1,860
    
    
    
    (281
    )Excess tax benefits from share based payment arrangements
    
    
    (393
    )
    
    
    (104
    )Change in assets and liabilities, excluding the effects of acquisitions and divestituresAccounts receivable
    
    
    (2,245
    )
    
    
    (1,663
    )Inventories
    
    
    223
    
    
    
    1,018Prepaid expenses
    
    
    (315
    )
    
    
    238Income taxes
    
    
    (1,070
    )
    
    
    177Accounts payable and other liabilities
    
    
    (881
    )
    
    
    1,143Deferred revenue
    
    
    4,564
    
    
    
    1,035Other current assets
    
    
    182
    
    
    
    838Other
    
    
    (108
    )
    
    
    (225
    )Cash provided by continuing operating activities
    
    
    15,279
    
    
    
    23,104Cash used by discontinued operations
    
    
    
    
    
    
    (116
    )Net cash provided by operating activities
    
    
    15,279
    
    
    
    22,988Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (2,096
    )
    
    
    (1,724
    )Purchase of investment securities
    
    
    (356
    )
    
    
    (247
    )Maturities/sales of investment securities
    
    
    18,035
    
    
    
    18,143Capitalized software development costs
    
    
    (689
    )
    
    
    (4
    )Net proceeds from sale of subsidiary
    
    
    
    
    
    
    75Acquisition of business, net of cash acquired
    
    
    
    
    
    
    (33,988
    )Net cash provided (used) by investing activities
    
    
    14,894
    
    
    
    (17,745
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    16
    
    
    
    1,676Payment for cancellation of stock options
    
    
    (993
    )
    
    
    Excess tax benefits from share based payment arrangements
    
    
    393
    
    
    
    104Dividends paid
    
    
    (4,479
    )
    
    
    (4,657
    )Purchase of treasury stock
    
    
    (19,081
    )
    
    
    (14,037
    )Net cash used by financing activities
    
    
    (24,144
    )
    
    
    (16,914
    )Net increase (decrease) in cash and cash equivalents
    
    
    6,029
    
    
    
    (11,671
    )Cash and cash equivalents, beginning of period
    
    
    7,083
    
    
    
    27,460Cash and cash equivalents, end of period
    
    $
    13,112
    
    
    $
    15,789
  - 3 -




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 1. Consolidation
  2. Basis of Presentation
   3. Earnings Per Common Share
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic weighted average shares outstanding
    
    
    29,257,702
    
    
    
    31,598,830
    
    
    
    29,740,992
    
    
    
    31,013,660Dilutive effect of outstanding stock options
    
    
    3,103
    
    
    
    97,461
    
    
    
    7,044
    
    
    
    70,092Dilutive effect of restricted shares
    
    
    8,228
    
    
    
    
    
    
    
    8,228
    
    
    
    Diluted weighted average shares outstanding
    
    
    29,269,033
    
    
    
    31,696,291
    
    
    
    29,756,264
    
    
    
    31,083,752
  4. Comprehensive Income
  5. Goodwill and Other Intangible Assets
  - 4 -




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##### Table of Contents



September 30, 2006
    
    
    December 31, 2005Gross
    
    
    Accumulated
    
    
    
    
    
    
    Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetTradename
    
    $
    3,000
    
    
    $
    
    
    
    $
    3,000
    
    
    $
    3,000
    
    
    $
    
    
    
    $
    3,000Customer relationships
    
    
    4,150
    
    
    
    876
    
    
    
    3,274
    
    
    
    4,150
    
    
    
    363
    
    
    
    3,787$
    7,150
    
    
    $
    876
    
    
    $
    6,274
    
    
    $
    7,150
    
    
    $
    363
    
    
    $
    6,787
 6. Share Based Compensation
      WeightedAverage Value
    
    
    AggregateShares
    
    
    Per Share
    
    
    Intrinsic Value(In thousands except per share amounts)Balance at January 1, 2006
    
    
    22
    
    
    $
    22.60
    
    
    $
    410Granted
    
    
    120
    
    
    
    14.14Vested
    
    
    (4
    )
    
    
    10.87Forfeitures
    
    
    (11
    )
    
    
    18.38Balance at September 30, 2006
    
    
    127
    
    
    $
    15.34
    
    
    $
    1,822
 - 5 -




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded September 30, 2005(In thousands except per share amounts)Net Income, as reported
    
    $
    4,916
    
    
    $
    18,720Add: Shared-based compensation expense included
in reported net income, net of tax
    
    
    13
    
    
    
    13Deduct: Total stock-based compensation
expense determined under fair-value based
method for all awards, net of tax
    
    
    (922
    )
    
    
    (2,529
    )Pro forma net income
    
    $
    4,007
    
    
    $
    16,204Earnings per share:Basic as reported
    
    $
    0.16
    
    
    $
    0.60Basic pro forma
    
    $
    0.13
    
    
    $
    0.52Diluted as reported
    
    $
    0.16
    
    
    $
    0.60Diluted pro forma
    
    $
    0.13
    
    
    $
    0.52
 7. Dividends
  8. Business Combinations
   Nine MonthsEndedSeptember 30, 2005(In thousands, except per share amounts)Net sales
    
    $
    102,585Income from continuing operations
    
    
    18,072Earnings per share from continuing operationsBasic earnings per share
    
    
    0.57Diluted earnings per share
    
    
    0.57
 9. Recent Accounting Pronouncement
  - 6 -




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Results of Operations
     Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net Sales:Products
    
    
    77.6
    %
    
    
    81.6
    %
    
    
    81.5
    %
    
    
    80.6
    %Services
    
    
    22.4
    
    
    
    18.4
    
    
    
    18.5
    
    
    
    19.4Total net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales:Products
    
    
    19.0
    %
    
    
    20.7
    %
    
    
    18.7
    %
    
    
    12.5
    %Services
    
    
    47.8
    
    
    
    36.4
    
    
    
    46.6
    
    
    
    39.4Total cost of sales
    
    
    25.4
    
    
    
    23.6
    
    
    
    23.8
    
    
    
    17.7Gross profit:Products
    
    
    81.0
    
    
    
    79.3
    
    
    
    81.3
    
    
    
    87.5Services
    
    
    52.2
    
    
    
    63.6
    
    
    
    53.4
    
    
    
    60.6Total gross profit
    
    
    74.6
    
    
    
    76.4
    
    
    
    76.2
    
    
    
    82.3Operating expenses:Product development
    
    
    15.9
    
    
    
    15.7
    
    
    
    14.6
    
    
    
    14.4Selling and marketing
    
    
    31.9
    
    
    
    26.5
    
    
    
    28.9
    
    
    
    25.7General and administrative
    
    
    14.9
    
    
    
    10.6
    
    
    
    14.8
    
    
    
    10.8Total operating expenses
    
    
    62.7
    
    
    
    52.8
    
    
    
    58.3
    
    
    
    50.9Operating income
    
    
    11.9
    
    
    
    23.6
    
    
    
    17.9
    
    
    
    31.4Other, net
    
    
    1.3
    
    
    
    1.3
    
    
    
    1.1
    
    
    
    1.6Income  continuing operations
before income taxes
    
    
    13.2
    
    
    
    24.9
    
    
    
    19.0
    
    
    
    33.0Income taxes  continuing operations
    
    
    4.9
    
    
    
    9.2
    
    
    
    7.0
    
    
    
    12.2Income  continuing operations
    
    
    8.3
    
    
    
    15.7
    
    
    
    12.0
    
    
    
    20.8Income from discontinued
operations, net of tax benefit of
$1,417 in 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .6Net income
    
    
    8.3
    %
    
    
    15.7
    %
    
    
    12.0
    %
    
    
    21.4
    %
 - 7 -




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##### Table of Contents



Three Months Ended September 30, 2006 and 2005
 Net Sales
  Cost of Sales
  Product Development
 Selling and Marketing
 General and Administrative
 Operating Income
 Income Tax Expense  Continuing Operations
 
 *
    
    AR, AccelScan, Accelerated Math, Accelerated Reader, Accelerated Vocabulary, AlphaSmart,
Dana, English in a Flash, KeyWords, Math Facts in a Flash, Neo, Read Now with Power Up!,
Renaissance, Renaissance Classroom Response System, Renaissance Learning, Renaissance
Place, STAR Early Literacy, STAR Reading, and STAR Math are trademarks of Renaissance Learning,
Inc. registered ®, common law or pending registration in the United States and other countries. - 8 -




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##### Table of Contents



Nine Months Ended September 30, 2006 and 2005
 Net Sales
  Cost of Sales
  Product Development
 Selling and Marketing
 General and Administrative
 Operating Income
 Income Tax Expense  Continuing Operations
 Discontinued Operations
 -9-




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##### Table of Contents



Liquidity and Capital Resources
    Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
  Operating Leases.
 Purchase Obligations.
  Contractual Obligations
    
    Payments due by Period(In thousands)
    
    
    
    
    
    Less than 1
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    year
    
    
    1- 3 years
    
    
    3-5 years
    
    
    5 yearsOperating lease obligations
    
    $
    4,428
    
    
    $
    467
    
    
    $
    3,350
    
    
    $
    611
    
    
    $
    Purchase obligations
    
    
    3,854
    
    
    
    3,769
    
    
    
    85
    
    
    
    
    
    
    
    Total
    
    $
    8,282
    
    
    $
    4,236
    
    
    $
    3,435
    
    
    $
    611
    
    
    $
    
 Critical Accounting Policies and Estimates
  -10-




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##### Table of Contents



Forward-Looking Statements
 Risk Factors
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
 Market Risk.
   Foreign Currency Exchange Rate Risk.
 -11-




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##### Table of Contents



Item 4. Controls and Procedures
    
 Part II  OTHER INFORMATION
 
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Total Number of
    
    
    Maximum NumberShares Purchased
    
    
    of Shares that MayTotal Number
    
    
    
    
    
    
    as Part of Publicly
    
    
    Yet Be Purchasedof Shares
    
    
    Average Price
    
    
    Announced Plans
    
    
    Under the Plans orPeriod
    
    Purchased
    
    
    Paid per Share
    
    
    or Programs
    
    
    ProgramsJuly 1-31, 2006 (1)
    
    
    26,252
    
    
    $
    12.19
    
    
    
    25,687
    
    
    
    880,868August 1-31, 2006
    
    
    182,300
    
    
    
    12.87
    
    
    
    182,300
    
    
    
    698,568September 1-30, 2006
    
    
    105,505
    
    
    
    14.10
    
    
    
    105,505
    
    
    
    593,063Total
    
    
    314,057
    
    
    $
    13.23
    
    
    
    313,492
 
 (1)
    
    Includes 565 shares purchased in an open-market transaction by one of our directors, John Grunewald. -12-




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##### Table of Contents



Item 5. Other Information
  
 Item 6. Exhibits
  Exhibit No.
    
    Description10.1
    
    Form of Restricted Stock Unit Agreement with Certain Non-Employee Directors10.2
    
    Form of Stock Certificate (1)10.3
    
    Fourth Amendment to Credit Agreement dated as of June 30, 2006 by and
between Wells Fargo Bank, National Association and Registrant31.1
    
    Section 302 certification by Terrance D. Paul31.2
    
    Section 302 certification by Mary T. Minch32.1
    
    Section 906 certification by Terrance D. Paul32.2
    
    Section 906 certification by Mary T. Minch
 
 (1)
    
    Incorporated by reference to Registrants Form 8A/A dated August 9, 2006 (SEC File No.
0-22187) -13-




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##### Table of Contents



SIGNATURES
  RENAISSANCE LEARNING, INC.(Registrant)November 6, 2006
    
    /s/ Terrance D. PaulDate
    
    Terrance D. PaulChief Executive Officer and a Director(Principal Executive Officer)November 6, 2006
    
    /s/ Mary T. MinchDate
    
    Mary T. MinchVice President-Finance, Chief Financial Officer and Secretary(Principal Financial and Accounting Officer)




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##### Table of Contents



Exhibit No.
    
    Description10.1
    
    Form of Restricted Unit Agreement with Certain Non-Employee Directors10.2
    
    Form of Stock Certificate (1)10.3
    
    Fourth Amendment to Credit Agreement dated as of June 30, 2006 by and between
Wells Fargo Bank, National Association and Registrant31.1
    
    Section 302 certification by Terrance D. Paul31.2
    
    Section 302 certification by Mary T. Minch32.1
    
    Section 906 certification by Terrance D. Paul32.2
    
    Section 906 certification by Mary T. Minch
 
 (1)
    
    Incorporated by reference to Registrants Form 8A-A dated August 9, 2006 (SEC File No.
0-22187)